A record decline in first-quarter computer sales helped
trigger the withdrawal, Blackstone said in a letter released
yesterday. The world’s biggest buyout firm made a non-binding
offer to acquire Dell last month, challenging plans by founder
Dell and Silver Lake Management LLC to take the company private
at $13.65 a share.

Blackstone had assembled bankers and buyout engineers, as
well as dozens of potential co-investors and consultants since
April 8 to grill Round Rock, Texas-based Dell’s executives about
divisions and model its prospects, people familiar with the
situation said. Blackstone’s exit removes the potential for a
bidding war, and it may also jeopardize the original deal by
spooking Silver Lake, according to Brian Marshall, an analyst at
ISI Group in San Francisco.

“People think the deal is going to fall apart,” said
Marshall, who has a neutral rating on Dell. “There’s always
ways to get out of a deal if Silver Lake wanted to bail.”

Dell shares declined 3.9 percent to $13.40 at yesterday’s
close in New York, 1.8 percent less than the original deal
price.

PC Decline

As more consumers check e-mail, browse the Web and watch
television and movies on smartphones and tablets, PC shipments
plummeted 14 percent in the first quarter, the worst decline
since researcher IDC began tracking data in 1994. Blackstone
cited “the rapidly eroding financial profile of Dell” and said
the market decline in PC volume is “inconsistent with
management’s projections for modest industry growth.”

Dell’s operating margin narrowed to 4.88 percent in the
fiscal fourth quarter through January, from 5.81 percent in the
year-earlier period, data compiled by Bloomberg show. Cash flow
from operations fell to $1.44 billion from $1.84 billion a year
earlier, the data show. The company reported an 11 percent drop
in sales, to $14.3 billion.

“It’s rare for a private-equity firm to drop out unless
they’re driven out by a bidding war or they find a monster under
the bed when they do due diligence,” said Erik Gordon, a
professor at the Ross School of Business at the University of
Michigan. “Everybody knew the PC business was falling apart.
The only question was how quickly.”

IBM Servers

Blackstone’s exit from Dell bidding followed reports that
International Business Machines Corp. is in talks to sell its
low-end server division to Lenovo Group Ltd. Servers have been a
bright spot for Dell, posting 18 percent sales growth in the
most recent quarter.

“Optically, IBM getting out of servers would present a
challenge,” to completing a deal for Dell, Marshall said.

Dave Johnson, one of the Blackstone executives overseeing
the firm’s bid, joined the buyout group in January from Dell,
where he led mergers and acquisitions for almost four years.
Before that, he served a similar role at IBM.

“IBM has made really good strategic decisions in the past
about when to exit markets,” said Jayson Noland, an analyst at
Robert W. Baird & Co. in San Francisco who has a neutral rating
on the shares and a $15 target price. “The chances are fairly
high that a deal will get done, but there’s a chance it doesn’t
and then the stock could go below $10.”

Icahn Proposal

Unlike Silver Lake, which has a significant Silicon Valley
presence with an office in Menlo Park, California, New York-based Blackstone doesn’t have a technology-focused investment
record and views the deal as a riskier turnaround project, one
of the people familiar with the situation said.

Under terms of its agreement with Dell, Silver Lake agreed
it could not back out of its bid. If it tried, Dell could sue
and get an injunction forcing Silver Lake to complete the deal.
Dell said in a filing yesterday that it continued to support the
transaction with Silver Lake and expected the deal to close by
the end of the fiscal second quarter, which ends in July.

Blackstone had offered to pay at least $14.25 a share to
current investors with an option to hold onto some of their
stake through a so-called equity stub. Billionaire Carl Icahn
bid $15 a share in cash for as much as 58.1 percent of Dell’s
stock. The Dell-Silver Lake deal would be a straight all-cash
buyout of the shares Michael Dell doesn’t own for $13.65 a
share.

Dell said April 16 that Icahn had agreed not to amass more
than a 10 percent stake in the company, or to join with other
shareholders to build more than a 15 percent holding. Icahn
received U.S. regulatory approval on April 10 to buy as much as
25 percent of Dell’s outstanding shares.

‘Logical Investor’

“Blackstone was viewed as a more logical investor to
follow through with this deal, so with them gone, the prospect
of a bidding war is also gone,” said Rich Kugele, an analyst at
Needham & Co. who has a hold rating on the shares.

Michael Dell and Silver Lake’s original bid has been
opposed as too low by the company’s largest shareholders
including Southeastern Asset Management and T. Rowe Price Group
Inc. The computer maker said last month that it got competing
offers from Icahn and Blackstone that may be superior.

Representatives for Dell, Silver Lake, and Southeastern
declined to comment. Icahn didn’t respond to a request for
comment.

“All along I have been saying that it behooves Dell to get
this deal done ASAP before more bad PC data causes another reset
in the valuation,” said Jim Kelleher, an analyst at Argus
Research who recommends selling Dell shares. “Financial buyers,
as opposed to strategic buyers, have a return cycle. They don’t
have the patience to ride out down cycles.”